Upland Panel Rejects City Manager’s Budget

Upland’s Finance Committee this week rebuffed city manager Rod Butler’s effort to hatch a budget for the upcoming 2016-17 fiscal year that would have diverted nearly $1 million earmarked for road improvements to the general fund, while the city’s personnel costs overall would have zoomed upward by 10.02 percent or $2,745,425 over the total compensation paid to the city’s employees during the current 2015-16 fiscal year.
The 2016-17 budget Butler had finance director Scott Williams prepare envisioned revenues of $45,727,220 and operating costs of $46,685,000. Buried within that budget were increases of 20.3 percent – $1,171,145 – into the city’s pension fund; 20 percent – $549,7217 – for so-called fringe benefits; and 5.39 percent – $1,024,553 – for salary increases. Into the mix were hefty increases for both the fire department and the police department – 12.5 percent and 11 percent, respectively – as well as the city’s administrative services division.
The spending plan was formulated with what the finance committee members made clear they felt was insufficient regard to the Upland Fiscal Responsibility Act adopted by the city council on a unanimous vote in January. The fiscal responsibility act was an idea put forth by Jason Gaudy, a member of the Upland Fiscal Task Force that was formed in 2013 to analyze the city’s options for dealing with its financial challenges.
The Upland Fiscal Responsibility Act mandates that the city “base its operating capital on demonstrable sources of revenue. The city shall maintain cash balances to adequately provide for economic uncertainties, local disasters or catastrophic events, and other financial hardships or downturns in the local or national economy or contingencies for unforeseen operational needs. The city shall retain, per policy, a minimum unassigned fund balance of at least 12.5 percent of general fund operating expenditures, with a goal of bringing the total level of reserves up to 25 percent. Once the 12.5 percent reserve goal is met, the city finance officer will provide recommendations to the council for assigning any additional reserves to reduce or eliminate deficit fund balances for funds supported by the general fund or operating needs… into an IRS Section 115 Trust for the sole purpose of funding future pension and other post employment benefit liabilities.”
This week’s meeting was intended to focus on the expenditure element of Upland’s upcoming 2016-17 budget. Last week, at the previous city finance committee meeting where the major focus had been on revenues into the budget, the committee’s chairman, councilman Glenn Bozar, had inquired as to the how roughly $978,000 in gasoline tax the city is due to collect, which traditionally and by previous city council mandate is earmarked for road and street improvements, had been transferred into the general fund. Butler, the city manager, at that time said the money was to be used to pay the city’s electrical bill, which Bozar interpreted as being rerouted to operations, and by extension, to salary and benefit hikes for employees.
This week, Bozar revisited the issue of the transfer of the gas tax money into the general fund, essentially asserting that this amounted to what he felt was a way of violating the city’s fiscal responsibility act, if not explicitly, then in spirit. The act was intended to impose fiscal discipline on the city, Bozar reasoned, and Butler was robbing Peter to pay Paul by avoiding depleting the city’s reserve account through sleight of hand involving consigning the road maintenance money to general city operations, which Bozar maintains have have been bloated by salary and benefit increases to staff.
“This is a non-starter,” Bozar told Butler. “You are transferring $977,663 from the gas fund, which is supposed to pay for roads and sidewalks, into the general fund, which is really to cover staff salary increases. You said it is going to pay [Southern California] Edison. I don’t understand that at all. Did our Edison bill go up some unexpected amount? We’re just playing a game of ‘I don’t want to take anything out of the reserves so instead I’ll transfer this other money to cover those expenses.’ When I look at the individual department budgets, my jaw dropped.”
Bozar suggested that Butler had to show more resolve in holding those departments to no or minimal growth in their operating expenses. He directly addressed police chief Brian Johnson and Fire Chief Paul Segala. “Sorry Chief… Sorry Chief,” he said, indicating that the 11 and 12.5 percent increases in the operating budgets tentatively carved out for their departments would not be forthcoming. He focused in particular on the arrangement entered into with the City of Montclair over the merging of the two city’s respective fire department management divisions, which was sold as a cost saving move. He asserted that Upland had not saved on its fire department operating costs as a consequence of the merger. His suggestion seemed to be that the fire department would need to streamline its function further and there should be no increases to its operational funding.
Bozar then turned to the expenditure of money through all of the city’s funds, including the general fund and its various enterprise funds, a total of $126,378,485, covering the water, sewer and trash collection utilities. He decried the 14 percent increase from around $8 million to $9,239,650 in the administrative services department budget. One upshot was his basic premise that the city could not and should not be hiring further staff.
One Upland resident in attendance at the meeting, Robert Nelson, referenced the budgeted hiring of another development coordinator, suggesting that was a luxury the city could not afford. “We have two on the payroll now,” Nelson said.
Bozar then dwelt upon the increased personnel costs – i.e., total salaries and benefits – envisioned in next year’s budget. This year – 2016-17 – the city is paying out $27,388,975 to cover salaries of current workers, their benefits and pensions for past workers. In 2016-17, the city will lay out $30,134,400, an increase of $2,745,425, or 10.02 percent. The breakdown on that shows that salaries will jump from $19,013,622 this year to $20,038,175 next year, a hike of $1,024,553, or 5.39 percent. The city, which paid $5,626,388 into the California Public Employees Retirement System this fiscal year, will see that contribution jump 20.8 percent to $6,797,533 in 2016-17 – an increase of $1,171,145 to cover the living costs of people no longer working for the city. And the city upped the fringe benefits – consisting of medical coverage, dental coverage, vision coverage, free life insurance and vacation pay provided to current workers – by 20 percent in 2016-17, from $2,748,965 last year to $3,298,692, an increase of $549,727.
Bozar and city treasurer Dan Morgan locked onto the issue of the city’s obligation to participate in the California Public Employees Retirement System, which has its own investment accounts against which it draws money to cover pension costs. When those investments reach their target earnings – 7.5 percent annually – the pension system is solvent and self-sufficient. But when earnings do not reach the 7.5 percent threshold, the state and all the municipal, county and agency entities that utilize it to provide pensions to their retirees must chip in to make up the difference. This arrangement will in time drive the City of Upland off a financial cliff, both Bozar and Morgan opined, as more and more employees retire and begin to draw pensions, coupled with the California Public Employees Retirement System continuing to miss its investment earnings goals. The retirement system formula allows employees to retire and draw as pensions yearly stipends that are equal to anywhere from 40 to 100 percent of their highest yearly salaries while working. Projections are that by the mid-2020s Upland will be paying more money in retirement benefits than in salaries to its employees.
This point was amplified by Upland resident Larry Kinley, who said, “You might think of a policy that temporarily freezes salaries until unfunded pension liabilities are reduced to a supportable level. Salary increases just compound the unfunded liability issue. You have a circulatory round robin on your hands that needs to be addressed.”
Bozar asserted that it is absolutely essential that the city avoid increasing the number of its employees. Though he did not use the term hiring freeze, Morgan did. Bozar acknowledged that in the current year the city had hired four police officers and four part-time police department technicians, but maintained those positions were to be paid out of available funding created as the result of the outsourcing of the city’s animal control division. Further hiring, Bozar intimated, should not take place as it would create more pensionable positions.
Bozar referenced a chart showing a red and a blue line representing, respectively, city spending and revenues over the last five years. Despite dwindling revenues from the still lingering economic downturn that persisted during the first two years represented on the chart, the blue revenue line remained on a trajectory above the red expenditure line until 2013. In 2014, however, the red line began a steady incline upward until at present the lines have nearly intersected. Bozar suggested the upward movement of the red expenditure line corresponded with staff hirings, compensations and benefits over the last two years.
“We have to take a pause and have a discussion about where this red line is and where the blue line is and where this red line and blue line are going to be in five years,” Bozar said. “With just about each one of these department managers’ requests you are in danger of going into the red. You need to show the council and employees where this is going. Let the facts speak for themselves. If we plugged in from this presentation what your totals are, we are going into the red with just this budget. You need to reevaluate your numbers for every department. This is not a responsible budget. You are thinking that with these transfers in [i.e., the gas tax previously earmarked for road repair], you can do it. But this budget is out of whack big time. It comes down to this hiring business. You have to review whether you can afford this. An 11.5 percent increase for the police department, a 14 percent increase for administrative services, a 12.5 percent increase for the fire department is off the charts.”
Bozar appeared to be steadily steering the discussion toward the fiscal responsibility act, but before he got there, councilwoman Debbie Stone, who with Morgan and Bozar rounds out the three-member finance committee, beat him to the punch.
“I think we really need to reconsider this,” she said. She told Butler, “We should have Scott [Williams, the finance director] put this together and bring it back to the finance committee. I do believe we have to look at this ordinance [the Fiscal Responsibility Act]. It was put there for a reason. It was like a promise to the residents. We need to do our job. l want staff and everyone to understand we’re not here to make a lot of money. We are beginning to dig into the reserves. It scares me to death to think that if we dip here and dip there and then we have a major catastrophe… I don’t want to go down that road. What road are you taking us down? I’m seeing red. We need to figure out what are we going to have to do to live up to what we signed and put in place.”
Bozar said that in raising salary and benefits of city workers by 10.02 percent and upping expenditures by 8.13 percent, the proposed budget was overrunning the projected 0.47 percent sales tax growth and 6.3 percent property tax increase the city would experience
To Bozar’s inquiries about what was behind the fringe benefit and salary increases, Butler responded, saying the salary increases came about as a consequence of much of staff’s normal advancement up the “step” ladder, meaning that they were due legally binding salary increases as a consequence of their having met service time milestones that were part of the city’s collective bargaining agreement – i.e., its employment contract – with its personnel that was worked out with their unions. The hefty fringe benefit increases came, Butler said, as a consequence of an earlier council mandate that any staff compensation enhancements be structured in such a way that they not increase the pensions employees will be due upon retirement. Since the formula to calculate pensions uses highest salary levels as a multiplier, Butler said compensation increases that were handed out came in the form of increased fringe benefits, which do not impact pension levels.
Butler momentarily sought to dissuade the committee from mandating that the economies be applied to the 2016-17 budget by telling its members that the city anticipated getting a windfall in 2016-17 in the form of a commitment from the state to reimburse municipalities across the board for a raid the state made on city coffers during the height of the recession to balance its budget. “The state has said it will backfill the cities with property tax it withheld in years past, which will artificially inflate our revenues,” Butler said. The the committee, however, did not see that as grounds for allowing expenditures to escalate at this point.
“We are not going to rubber stamp this proposed budget,” Bozar said. “I do not feel comfortable recommending this to the full council.”
Butler relented, bowing to the edict that the budget be reworked.
“I agree that we need to be really careful about our revenue projections,” Butler said. “We will go back into the details of what are the scenarios of how we do business.”
The committee voted unanimously to not present the budget proposal to the full council and instead have it revised to come into compliance with the fiscal responsibility act.
Shortly after the Tuesday meeting, finance director Williams told the Sentinel the mandate given to Butler to, as Bozar phrased it, “give the budget a haircut,” will likely result in the elimination of staff positions.

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